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2008 (10) TMI 384 - AT - Income TaxDeduction u/s 10A - Free trade zone - 100 per cent Export Orientated Unit - export turnover - no deduction can be allowed if the domestic sales exceed the prescribed percentage - assessee is contending that if the domestic sales exceed the prescribed percentage, then the deduction on domestic sales is to be allowed by restricting it to the extent of the twenty five per cent of the total sales - HELD THAT - The cap has been provided on the profits derived from the domestic sales meriting inclusion in the deemed profits from the export of articles as restricted up to twenty five per cent of the total sales. To put it more simply, the profit from the domestic sales is deemed as profit from export of articles to the extent it does not exceed 25 per cent of total sales. If the ratio of domestic sales out of the total sales is more than 25 per cent then the profit from the domestic sales upto 25 per cent is to be deemed as profit derived from the export of eligible articles. We, therefore, dismiss the ground raised by the revenue and allow this part of the Ground No. 1 of the assessee s appeal. Therefore, we direct the AO to recompute the deduction u/s 10A by considering the export turnover as reduced by the local sale made to M/s. Neogem India Limited and to M/s. Shankar Jewels. Profit from export of traded goods - whether eligible for deduction? - CIT(A) has not granted deduction to the assessee insofar as it relates to the profit from export of trading goods - HELD THAT - Section 10A is akin to section 80HHC in some respects, as will be seen infra and the later section also provides for deduction in respect of profits from the export of the goods or merchandise manufactured by the assessee as well as from the export of trading goods. Since the benefit has been granted to the profits and gains derived from the export of eligible articles, without further restricting it to the articles manufactured by the assessee in its industrial undertaking, we are of the considered opinion that the ld CIT(A) was not justified in excluding the export of trading in goods from the qualifying exports. Sale of finished goods to local parties - whether qualify as export?- Assessee made local sales of finished goods to TJEL, M/s. Neogem India Limited and Shankar Jewels - claimed deduction on this amount by treating it as part of exports - CIT(A) held that no deduction can be allowed on this part of the turnover - HELD THAT - There is no indication in the section for treating the local sales as exports. It is trite law that unintended benefit cannot be granted by stretching the provision so far as to breach the prescription of the section itself. We cannot read what is not provided in the section. No analogous provision has been inserted in section 10A. If the intention of the Legislature had been to provide deduction on the line argued by the ld. AR, then suitable stipulation had been made accordingly. In the absence of such provision, sub-section (3) of section 10A shall have full effect and resultantly domestic sales of finished goods cannot be equated with the exports save as otherwise provided in proviso, as discussed in I above. We, therefore, reject this argument of the assessee. Sales made to holding company without profit - whether qualfies for exclusion from export and total turnover?- Assessee claimed deduction on the total income - CIT(A) held that local sales of raw material as made by the assessee to its holding company to be included in the total turnover but not in the export turnover - HELD THAT - It is admitted position that the assessee purchased the goods in its dominion by making the payment at his own. It has not been shown that the amount equal to the purchase price was obtained by the assessee in advance from the holding company. On making the purchase, the ownership in the goods vested in it. Transferring some part of the goods purchased by it to subsequently on invoice is an altogether different transaction. We, therefore, hold that this amount merits inclusion in the total sales for the purposes of calculating the benefit of deduction u/s 10A. Deduction u/s 10A - Foreign exchange gain - CIT(A) held that accrual of foreign exchange fluctuation gain on the opening balance of the debtors cannot be said to have been derived from eligible business of industrial undertaking u/s 10A - HELD THAT - There is no logic in splitting the amount of export turnover into two parts, viz., the first part as relatable to the year one and the second part as relatable to the year two, more specifically, when a clear and unambiguous provision has been enshrined in this regard. If that is the position that the foreign exchange fluctuation gain as relatable to the year one realized within six months after the close of the year or with in such further period as allowed by the competent authority is to be treated as part of the export turnover for the year one and not the year two, then logically such amount would also stand excluded from the income of year two and form part of the income of year one. This view has been recently taken by the Special Bench of the Tribunal in the context of section 80HHC in the case of Asstt. CIT v. Prakash L. Shah 2008 (8) TMI 387 - ITAT BOMBAY-K .Therefore, we hold that assessee is not entitled to benefit of deduction u/s 10A with reference to foreign exchange gain . The income to this extent would also be excluded and would form part of the income of the preceding year and the deduction u/s 10A on this part will be eligible in the said preceding year. We order accordingly. In the result, the appeal of the revenue is dismissed and that of the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Deduction under section 10A of the Income-tax Act, 1961. 2. Interpretation of the proviso to sub-section (1) of section 10A. 3. Eligibility of profit from the export of traded goods for deduction. 4. Qualification of local sales of finished goods as export. 5. Inclusion of sales made to the holding company without profit in export and total turnover. 6. Treatment of foreign exchange fluctuation gain on opening balance of debtors. Issue-wise Detailed Analysis: I. Deduction under section 10A of the Income-tax Act, 1961: The assessee, engaged in manufacturing and exporting studded precious metal jewelry, claimed a deduction under section 10A amounting to Rs. 3,46,85,025. The Assessing Officer (AO) noted that the assessee made local sales of Rs. 16,06,45,406, which were included in the total sales of Rs. 51.90 crores. The AO denied the deduction under section 10A, arguing that local sales exceeding 25% of the total sales disqualified the assessee from the deduction. The CIT(A) disagreed, allowing the deduction only on export turnover and not on local sales exceeding the prescribed percentage. II. Interpretation of the proviso to sub-section (1) of section 10A: The revenue contended that no deduction under section 10A should be allowed if domestic sales exceeded 25% of the total sales. The CIT(A) held that the deduction could still be allowed on the export turnover, notwithstanding the higher domestic sales, but not on the excess domestic sales. The Tribunal clarified that the proviso allows for deduction on profits derived from domestic sales up to 25% of the total sales. If domestic sales exceed this percentage, the deduction is restricted to the profits from such sales up to 25% of the total sales. III. Profit from the export of traded goods - whether eligible for deduction: The CIT(A) denied the deduction for profits from the export of traded goods, arguing that the deduction is only for manufactured goods. The Tribunal disagreed, stating that section 10A allows deduction for profits derived from the export of articles or things, without restricting it to manufactured goods. Hence, the export of traded goods worth Rs. 3.23 crores qualifies for the deduction. IV. Sale of finished goods to local parties - whether qualifies as export: The assessee claimed a deduction for local sales of finished goods worth Rs. 4.73 crores, arguing these should be treated as exports since the buyers eventually exported them. The Tribunal rejected this argument, emphasizing that the deduction under section 10A is only for direct exports by the assessee. Local sales, even if the goods are later exported by the buyers, do not qualify as exports for the assessee. V. Sales made to holding company without profit - whether qualifies for exclusion from export and total turnover: The assessee argued that local sales of raw materials to its holding company on a no-profit basis should be excluded from total and domestic sales. The Tribunal disagreed, stating that the absence of profit does not change the nature of the transaction as a sale. These sales must be included in the total turnover but excluded from the export turnover. VI. Treatment of foreign exchange fluctuation gain on opening balance of debtors: The CIT(A) excluded the foreign exchange fluctuation gain on the opening balance of debtors from the eligible profits for deduction under section 10A. The Tribunal upheld this decision, stating that the gain relates to the preceding year and should be included in the income of that year, not the current year. Conclusion: The Tribunal directed the AO to recompute the deduction under section 10A, considering the export turnover at Rs. 31.64 crores, including the export of traded goods and excluding local sales to the holding company from the export turnover. The appeal of the revenue was dismissed, and the assessee's appeal was partly allowed for statistical purposes.
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